Changes To 'Soft Dollar' Rules May Extend To Hedge Funds

by Carla Johnson, Investors Offshore.com

06 February 2004

As the US financial regulators consider ways of bringing the hitherto largely-unregulated hedge fund sector into a more conventional compliance set-up, a debate that has sprung up around the possible tightening of the so-called ‘soft dollar’ rules could have a significant impact on the way hedge funds operate.

Soft dollars basically entail the use of brokerage commission for investment-management tools such as research, computer hardware and software and news services. Money managers pay a broker a higher-than-normal commission in order to receive these services for no charge.

Mutual funds are restricted in their use of soft dollars and must abide by the list of items drawn up by the Securities and Exchange Commission’s 'safe harbour' rules. Hedge funds however, are governed by a looser regulatory regime and the practice of soft commission is particularly suitable to the more flexible investment styles practiced by their fund managers.

However, the Investment Company Institute has lobbied the SEC to outlaw the use of soft dollars to pay for many of the items listed under the safe harbour rules, and wants a potential ban to apply across the board, meaning hedge funds as well as mutual funds will be restricted.

Furthermore, hedge funds could find themselves constrained further if the SEC approves a staff proposal that would compel hedge fund managers to register as investment advisors, subjecting them to a much tighter compliance regime.

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